On paying and being paid

In the 9 years I have been running edgeofmyseat.com I have issued a large number of invoices but also received many invoices for freelancers and small companies working for us. Our policy is simple – we pay our contractors on or before the due date of the invoice. If we ask someone to do some work and they do it, we pay them according to the agreed terms. The odd time we have been chased for a payment due to an accounting mess up on my part, I have felt terrible about it. It’s not how we do things.

However for many companies paying as late as possible appears to be company policy. Websites such as Pay On Time have lots of excellent advice for getting paid as quickly as possible. For example sending an initial invoice, then a statement before that invoice is due, sending a reminder when it becomes due, then another when it is x days overdue, visiting the client or phoning their accounts department. All of this to receive money for work that your company has already done, to terms that were agreed beforehand. What a phenomenal waste of time! Large companies have people who spend their days dealing with this nonsense, for small companies and freelancers it is usually the business owner who spends their time chasing people who have no intention of not paying, they just want to wait as long as possible.

Some large companies have very fixed accounting procedures, which is fine if they are up front about this from the outset and we know when and how to submit invoices, and can decide if we are happy to work under those terms. However, more often the accounting system is used as an excuse once payment is already late. Also, this is 2010, if your accounting system means that everyone you pay has to wait 60 days while their invoices crawl through the system, there is something seriously wrong with that system.

If the work is being done by massive company X for massive company Y then it is likely that those doing the work have no idea that invoices don’t get paid for 60 days, however if your company has a policy of late payment, here is something to think about. If you use small companies or freelancers then the person who will be chasing up unpaid invoices will often be the same person who is doing the actual work. Next time you ring with an urgent job that needs doing – will that person be remembering their wasted hours chasing payments from you? By paying on time you demonstrate that you appreciate the work of your suppliers, and become a more valuable client, making it far more likely your work will be fit into busy schedules.

Is this just a UK issue – or is late payment culture as common in the US, Europe or other countries around the world? Or are you a business owner who can give me a reasonable argument for paying suppliers late?

In my experience as a former accountant I found that tendency to pay on time was inversely proportional to the size of the business. i.e. the smaller the business, the more likely it was that they would break payment terms.

In the vast majority of instances it simply comes down to the customer’s poor cashflow. Even when economic times were good I would estimate that a third of small businesses were living a hand-to-mouth existence.

The bad habit of the larger companies is to unilaterally change their terms. It’s quite common, for example, for companies to move from 30 to 60 day payments and tell their customers to, in essence, love it or leave it.

Unfortunately, this seems to be part of the UK’s business culture for many companies. You’re the exception to this. In my case, most people do pay reasonably promptly and for those that do not, I just try and be polite but persistent with the occasional shut-down notice.

When I set-up as a web freelancer, I never thought that chasing payments would be part of my job description. It is and it feels pretty uncomfortable at times even though I think I’m getting better at it. Would rather be working on websites though.

Rachel
on the 11 Oct 2010:

The way that big companies will change terms and otherwise mess around small businesses is the main reason why we don’t chase big company tenders. We’re fortunate to be in a position where we don’t need to. I’ve seen many a small company find their celebrations on landing a big contract quickly turn sour when they are having cashflow issues due to needing to pay their staff to service the contract with no payment from the big company in sight. Morally I just find it so wrong. Why are we in a situation where the big guys screw over the little guys and that is seen as “good business”?

When small companies deal with larger ones, particularly big, publicly traded ones, it’s important for the small company to appreciate that payment of their invoices will be slow. I know it’s not necessarily fair, but to some extent, that’s the way it goes. (And, yes, we could definitely have a whole other conversation on the fairness of business …) So, smaller businesses must be sure beforehand that their cashflow can handle the delayed payment. In my experience, payment will always be made in the end, it’s just a matter of being able to wait out the delay.

The upside of working with bigger companies is typically bigger projects and bigger budgets. The downside is the slowness of payment. It’s all a matter of risks and rewards; the trick for a small business is to be sure it can manage the risk (by maintaining a strong cash flow) to secure the reward.

As for paying my own suppliers, I try to pay in the same way that I demand services. When I ask my suppliers to turn around projects quickly, I make efforts to pay them as quickly as they work, effectively rewarding their extra efforts with quick cash. (This also helps secure suppliers’ willingness to handle future requests for speedy work.)

Morally you may well find it wrong, but this is capitalism and morality doesn’t come into it.

Having worked for a large company organising invoices for that department, then we processed our invoices on a monthly basis and which were then passed on to the accounts department for payment.

On average it would have taken two months for an invoice to be paid, so sometimes less, sometimes more.

Late payment is the bane of all businesses. There isn’t really a solution to it although at least web designers usual ask for a deposit first and then don’t hand over the final product until all invoices have been settled.

Sean Johnson
on the 11 Oct 2010:

For me it’s simple, and I don’t understand why so many in ‘our industry’ have such a problem.

Back in pre-historic times, you used to allow 30 (, 60 or 90) days so the client had time to pass the invoice to their accounts, the accounts raise a cheque and snail-mail it back to you. You then had to bank it and wait on clearance! In this day and age, who still uses cheques? A bank wire can be setup and money transferred AND received all in one day! No need for 30 days anymore.

And the simplest way of getting paid on time is to write into your contract that no website goes live or artwork released for print until the final invoice has been paid in full. I haven’t had anyone find this a problem, including a couple of bigger companies who you’d expect to be the dinosaurs with late payment.

Rachel, this is a problem in the US as well. All of my smaller clients, when expecting to pay me late, have always been fairly up-front about it. But large businesses, to your point, wait until the last possible moment, and then stick you with having to run the gauntlet of accounts payable staff and finance procedures. Even when a contract stipulates that late charges can be assessed, getting those from a large company has always been impossible, in my experience.

As someone who has worked both sides of this — I’m usually at the big company hiring friends for contract work — I can say that I’ve actually been told by finance types that they always intend to pay late to small businesses, precisely because the little guy has next to no recourse than to wait to be paid. So, I usually caution my friends about this before they sign a contract with whatever company I’m at — and I usually try to get them some portion paid up-front to help mitigate late payments later.

Also as well, businesses deliberately pay late as a means of saving money.

See the report released today by Philip Green into government financing:

“He says that the norm in most departments is to pay suppliers in five days, compared with the standard 30 days payment period for most private-sector transactions, and 45 days demanded by some bigger companies (like his own).

“If the government demanded a minimum of 30 days of credit from suppliers, it would save hundreds of millions of pounds in financing costs.”

Andy: Negotiating longer payment terms is a whole different issue. We have clients on all kinds of terms – if someone declares they can only pay on certain terms then it is up to us as a business to decide if we want to do business with them. However, what is an issue is the general ignoring of supplier terms – even after signing contracts accepting them.

Sean: not everyone does design work that they can hold back from the client until payment is made. We’re a development shop and a lot of the time are offering consultancy, training, or installing something onto an existing server so once the work is done, it is done and in situ (or the consultancy has happened etc.) If you can get away with never delivering until you have payment then you are very fortunate and shouldn’t have this problem.

Also, this conversation has moved onto the tactics of large businesses. What concerns me more is the way that small businesses seem to follow suit. I’d like to encourage small businesses to support each other, be upfront if they are going to pay late due to a cashflow issue, and not act as if paying late was some kind of marker of having great business sense.

It’s the same in Australia (and other countries as well I guess). Cash-flow management is stated as the reason for delays with some people. If we miss deadline for invoicing we have to wait for the next payment block, whereas the same rules don’t seem to apply for delivering the work agreed upon.

Basically, isn’t this just bad ethic on behalf of the payer, I don’t think the Country matters. The people you work for does.

Having started freelancing in a recession, my payment terms are simple: a 25% upfront deposit, with further 25% milestone payments at agreed intervals, and a final 25% payment before the web site goes live.

The 25% deposit confirms to me that a prospective client is serious about a project. Further 25% payments make the client feel involved with the project, and ensures they actually review the work rather than just signing it off and then coming back at the end with a list of changes. For them, the next 25% payment signifies they’re happy with the work to date, and want to continue. It gives them some protection, too – if I don’t produce the work, I don’t get paid.

Only once have I ever had to chase an invoice (ironically because I put a web site live before the final payment), so I’ve stuck to my guns on this one.

I’ve had a few businesses in the past say the above doesn’t work with their payment terms. I explain that I am a one man band freelancer, that my rates are competitive because of my payment terms, which means I don’t have to include an overhead for invoicing & chasing clients, and ongoing part payments ensure I have a smooth, steady cashflow. It also means I’m not worrying / stressing about not being paid, which can have a negative impact on (their) work.

If a business doesn’t understand the above after its been explained, then I simply move onto the next one. A risky strategy by dropping a prospective client? Probably – but I’d rather have no client than a late (or non) paying one (and I guess I’ve been lucky, as another prospective client has always then come along wanting work done).

Tim
on the 08 Nov 2010:

As a freelancer, I’ve come across this a lot. I mostly work with other web dev shops, and in the main they’re pretty good payers (albeit usually exactly on time, rather than early). I’ve had clients in the past who have been horrendously late with payments before (6 months late in one case), and I’ve adopted a strict policy now that if I get messed around on payments, they drop down my list of priorities (ie if they come back for more work and someone else who pays promptly is also asking, the good payer gets preference), or in the extreme cases, go on my no fly list of agencies I’ll avoid working for unless they sort themselves out.

For smaller companies I can sort of see why they’re sometimes late, they’re normally waiting for their client to pay them, so that they can pay their freelancers, but that said, they should manage their cashflow so that its not an issue.

Whenever I sub out bits of design work to other freelancers, I always make sure that I pay them promptly, preferably as early as I can after the work’s signed off. Its meant that I have some excelent relationships with some really good folks who will always make an effort to squeeze any work I offer them in, because they know they’ll get paid with no fuss.

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